Saying that a series of public-spending programs endorsed by successive administrations had done little but drag Japan deeper into debt, the London-based agency cut its rating on Japanese government bonds by one notch from "AA+" to "AA."

"Japan's credit fundamentals continue to deteriorate," it said in a statement. "Fitch warns that continued denial over the severity of the economic problems facing Japan and persevering with a 'muddling through' approach will over time further erode creditworthiness and Japan's sovereign ratings."

The move follows announcements in September from rival ratings agencies Moody's and Standard & Poor's, which placed their respective Aa2 and AA+ ratings of Japan's local debt on review for possible downgrade.

The announcement weighed on bond prices in Tokyo on Monday. The yield on the benchmark 10-year Japanese government bond was pushed up to 1.3750 percent from 1.3550 percent Friday as its price fell 0.18 point to 100.21.

The resulting movement into stocks - along with some signs that Japanese banks were addressing their bad-loan portfolios - helped the benchmark 225-issue Nikkei Stock Average closed up 367.48 points, or 3.4 percent, to 11,064.30, its highest finish since late August.

Koizumi won acclaim from financial markets after taking Japan's top job last April with a promise to bring the nation's bloated debt under control by limiting sales of government bonds used to pay for public spending.

But the popular prime minister's commitment to fiscal belt-tightening - and to the rest of his economic reform platform - has come under fire in recent months, with the criticism getting louder after his administration approved last week plans for a second economic stimulus program this fiscal year.

Koizumi's conservative party has traditionally rewarded its supporters in the construction industry with big-ticket public-works projects, and signs that the party's old guard has no intention of giving up that privilege has economy watchers like Fitch worried.

"(Koizumi) is meeting very considerable resistance from other members of the political establishment," the agency said in its statement, adding that his reform efforts "remain lacking in the areas of financial restructuring and medium-term fiscal consolidation."

His predecessors free-spending ways have left the country with a debt of almost $5.4 trillion, equivalent to 130 percent of gross domestic product - the highest debt-to-GDP ratio of any advanced industrial economy.

Fitch expects the Japanese government's debt to rise above 150 percent of the country's GDP by the end of 2002.

The agency said that the global economic slowdown had dealt a double blow to Japan's efforts to lift itself out of a decade-long slump by undermining exports and technology-related investment.

The world's second-largest economy is already suffering from persistent deflation, record unemployment and a crushing burden of bad loans left over after property and stock prices collapsed at the beginning of the 1990s.